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Fair Value of Financial Assets and Liabilities
9 Months Ended
Sep. 30, 2011
Fair Value of Financial Assets and Liabilities [Abstract] 
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

NOTE G – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas, unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

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Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

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Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

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Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, notes payable, and short-term debt, approximates its fair value because of the short-term maturity of these instruments. At September 30, 2011, the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements which are considered to be level two inputs. There have been no transfers in or out of level two for the three month period ended September 30, 2011. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt are as follows:

 

                                 
    September 30, 2011     December 31, 2010  
        Fair Value         Carrying Value           Fair Value         Carrying Value    

Long-term debt and related current maturities

   $ 14,056     $ 13,986     $ 10,738     $ 10,650  
   

 

 

    

 

 

    

 

 

    

 

 

  

As a result of being a global company, the Company’s earnings, cash flows and financial position are exposed to foreign currency risk. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company accounts for derivative instruments and hedging activities as either assets or liabilities in the consolidated balance sheet and carries these instruments at fair value. The Company does not enter into any trading or speculative positions with regard to derivative instruments. At September 30, 2011, the Company had two de minimus derivatives outstanding.

Foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other operating (income) expense on the statement of consolidated income during the period in which the derivative instruments were outstanding.

During June 2010, the Company entered into a forward foreign exchange contract to reduce its exposure to foreign currency rate changes related to the purchase price of Electropar, which closed on July 30, 2010. The forward foreign currency contract had an exercise value of $12.9 million which matured on July 28, 2010. The realized gain recognized at maturity was $1.2 million, which the Company has recorded in the other income (expense) line on the statement of consolidated income.

 

As part of the Purchase Agreement to acquire Electropar, the Company may be required to make an additional earn-out consideration payment up to NZ$2 million or US$1.5 million based on Electropar achieving a financial performance target (Earnings Before Interest, Taxes, Depreciation and Amortization) over the 12 months ended July 31, 2011. The fair value of the contingent consideration arrangement is determined by estimating the expected (probability-weighted) earn-out payment discounted to present value and is considered a level three input. Based upon the initial evaluation of the range of outcomes for this contingent consideration, the Company accrued $.4 million for the additional earn-out consideration payment as of the acquisition date in the Accrued expenses and other liabilities line on the consolidated balance sheets, and as part of the purchase price. The amount accrued in the consolidated balance sheet of $1.3 million has increased $.9 million due primarily to a $.8 million adjustment for actual results and a $.1 million increase in the net present value of the liability due to the passage of time. The adjustment of $.8 million was recorded in Costs and expenses in the consolidated statements of income.